Latest Appraisal Techniques in SME & Retail Loans Nilesh Ghuge - - PowerPoint PPT Presentation

FINANCE SYMPOSIUM

Latest Appraisal Techniques in SME & Retail Loans

Nilesh Ghuge – President, Business Banking, Yes Bank

**************************** Small and Medium Enterprises (SMEs) sector has emerged as a dynamic and vibrant sector of the economy. This sector is the backbone of India’s economy and the key to our competitiveness.

SME Sector in

India accounts for

35 % of exports 95% of all industrial units 40% of industrial output 70% of industrial employment Prime driver of new employment

SME sector is vital to the Indian economy

SME SECTOR – VIBRANT & DYNAMIC

SME Scenario – Global Vs Indian

Country Share of total establishment Share of Output Share of Employment Share of exports India 95% 40% 45% 40% U.S.A. 98% N.A. 53% N.A. Japan 99% 52% 72% 13% Taiwan 97% 81% 79% 48% Singapore 97% 32% 58% 16% Korea 90% 49% 51% 40% Malaysia 92% 13% 17% 15% Indonesia 99% 36% 45% 11%

Source: International Finance Corporation

Small makes a Big Difference

• Small industries contributes 39% of the manufacturing output and around 40% of the

total export of the country.

• This sector employs an estimated 31 million persons spread over 12.8 million enterprises.
• The labour intensity in the MSE sector is estimated to be almost 4 times higher than large

enterprises.

• This sector is already getting major boost due to various government initiatives such as

`Make in India’. As India gears up to retrace the high growth path, the MSMEs sector assumes a pivotal role in driving the growth engine.

Characteristics of SMEs

• Low Capital Base & Limited Assets
• Geographical Diversity & High Mortality
• Poor Access to Capital Markets
• Scattered (Cluster approach – a solution)
• Lack of Collateral
• Cash Intensity in Transactions (Demonitisation)
• Poor Financial Disclosures (tax issues?)
• Poor Marketing
• High Risk Perception (leading to high borrowing costs)

What do SMEs want ?

• Reliable & Good Quality Service
• Loyal and Lasting Banking Relationship
• Doorstep Banking
• Relationship Manager (One point contact)
• Comfort/ Relationship with Financiers’ Staff
• Low Cost of Delivery
• Combination of Personal and Business Banking

SWOT Analysis - SME

STRENGTHS

 Quick decision making ability  Risk taking ability  Strong emotional bonding with self created business  Creating self sustaining business model  Self Developed leadership Values

WEAKNESS

 Resistance to spend for long term

• bjectives

 Tendency to divert business profit to personal use  Limited human resources and staff  Higher cost of production

OPPORTUNITIES

 Government regulation softening  Increasing reliance on technology  Growing demand and customer base

THREATS

 New substitute products emerging  Price competition  Economic pressure

8

SMEs -- Lender’s perspective

• Competence & Structure
• Net Worth & Consistency
• Promoter’s Stake & Involvement
• Succession Plan
• Corporate Governance
• Growth
• Key Financial Ratios
• Statutory Complied
• Credit History & Rating
• Updated & True financials
• Vintage
• Customer Concentration
• Product Offering
• Innovative Offering
• Future Plan
• Raw Material Availability
• Market Access
• Industry Type
• Government Policy
• Global Scenario
• Sunrise or Sunset
• Impact of Technology

Industry Business Model Management Financials

ENTRY GROWTH MATURITY

• Working Capital Funding
• Term Loans – Expansion
• Doorstep Banking
• Personal Banking of Promoters
• Corporate Finance & Advisory
• Working Capital Funding
• Term Loans – Upgrades
• Cash Management Solutions
• Trade Payments & Remittances
• Vendor/Supplier Financing
• Salary Payout Management
• VC/Pvt. Equity
• Working Capital Funding
• Cash Management Solutions
• Trade Payments & Remittances
• Vendor/Supplier Financing
• Salary Payout Management
• Wealth Management Advisory
• Loan Syndication
• IPO Advisory
• Business Valuation Services

SME Revenue

Lifecycle Banking with clients

Operating Cycle and product opportunities

Raw material Packing credit CC-stock PO finance (pre shipment) Work in progress Packing credit CC-stock PO finance (pre Shipment) LCs (Inland / Import) Finished goods Packing credit CC-stock PO finance (pre shipment) Cash management (payouts) Receivables Bill / invoice discounting CC-receivables PO finance (post shipment) LC discounting Cash management (collections) Bank guarantees (customs / excise) Receivables purchase Collection bills Forex Cash O/d against term deposits / auto sweep Liquid mutual funds

• Term loans
• Bank guarantees
• SBLCs
• Employees / promoters

savings accounts

• DDs / PAP cheques
• Insurance products
• Other retail bank

products Inventory / Channel finance

‘One Bank’ approach thereby offering complete suite of products to SME Banking clients

Appraisal Technique

• Funding under CGTMSE upto INR 10

MM

• Extending charge on assets without

additional collateral for existing customers

• Unsecured Funding on Anchor Comfort

through Dealer/Vendor Finance model

Financing Challenges Financing Techniques/Solutions

Limited Assets ; Inability to provide Assets as Collateral Non Availability/Lack

• f Financial History
• Credit assessment based on Surrogates

such as banking transactions of the customers (No Financials requirement).

• Parameterized Overdraft for pre-

qualified customers.

• Funding on basis of Payment Guarantee

`One-size-fits-all’ approach

• f majority of Banks – lack
• f understanding of SME

Business Strengths

• Cluster Financing - Enables lending to

SMEs located in close proximity/same Industry segment

• Life cycle Financing

Generic Products – Irrespective of Industry Segment dynamics

• Knowledge

Banking – Develop differential products and risk programs based on understanding of key SME sectors.

Appraisal Technique

Financing Challenges

High Servicing/ Administrative Costs associated with the Sector

• Lowering cost through tie-ups with

CGTMSE/rating agencies

• Use of Digital platforms to reduce

costs and optimise geographical reach.

Financing Techniques/Solutions

SME clients served through non dedicated channels

• Dedicated Relationship Manager to

handle client relationship

• Doorstep Banking
• Simple

solutions like Mobile Banking/CMS to be

• ffered

& properly marketed to this sector

• Digitization of Approval and other

In- house processes

Appraisal Technique

Financing Challenges

Perceived as High risk

segment

• Effective use of CIBIL to remove

information asymmetries and reducing problems

• f

adverse selection Lack of customer awareness

• n digital channels

Financing Techniques/Solutions

Quick Assessment

• Parameterized program basis

banking transactions to cater to lower ticket size.

• Funding to based on organised data

from Anchors eg. Sellers of e-commerce

• Auto renewals of limits basis account

conduct.

Need for lower Ticket

size

Limited Funding Availability

• Approach to offer complete range of

product to lend to entire spectrum of MSME clients – One stop solution.

Appraisal Technique

Financing Challenges Financing Mechanism/Solutions

Pre-approved Car loan for business/personal use Mortgage of property to meet business expansion needs. Customised CV loan for purchase of Commercial vehicles and refinance for working capital needs Equipment Finance Home loans to make Housing dream

• f SME come alive / Affordable

Housing for employees

Retail Products Offering to SME

Government Thrust to MSME

MSME

PRSF NSIC CGTMSE TUFS STAND UP INDIA MAKE IN INDIA

The government has recognized the key role that this segment plays in

• creating new enterprises
• in providing employment to a large

segment of the population

17

THANK YOU

MSME Finance Demand

Overall Finance Demand

Finance Demand by Registered Enterprises Finance Demand by Unregistered Enterprises Immediately Addressable Demand Immediately Addressable Debt Immediately Addressable Equity

INR 32.5 Trillion INR 2.5 Trillion INR 30 Trillion INR 10.6 Trillion INR 9.9 Trillion INR 0.67 Trillion Total finance demand of INR 32.5 trillion in the MSME sector which comprises of INR 26 trillion of debt demand and INR 6.5 trillion of equity demand Out of the overall finance demand, 78% is self financed or from informal sources and remaining 22% is through formal sources of which bank accounts for nearly 85% of debt supply to the MSME sector

Three Pillars For MSME Growth

Legal and Regulatory Framework

• Legal and regulatory

framework to define the sector – MSMED Act 2006

• Financial regulations to

bolster supply of finance – SARFAESI 2002, Credit

• Information Companies

(Regulation) Act 2005

• Inclusion of MSE in

purview of PSL

• Master circulars on

lending to MSME Government Support

• Policies to facilitate

support on multi- pronged support

• Promotion of cluster

development

• Financial support

through apex sector bodies like SIDBI

• Funding support to

credit guarantee schemes to enhance unsecured financing

• Support to increase

penetration of credit rating Financial Infrastructure Support

• Credit Bureau to track

credit history of enterprises

• Collateral registry of

immovable assets

• Credit rating agencies
• Asset reconstruction

companies

• SME stock Exchange to

facilitate primary and secondary transactions for SME securities

Trade Finance Private Equity CGTMSE SME Exchange Subsidy schemes ECB

Financial Solutions through the Business Life Cycle

Unsecured Business Loans Financing Receivables Banking Transactions NCD Commercial Papers IPO/FPO